Country-by-Country Reporting: VIEs, PEs, Grantor Trusts and Other Nuances

International tax issues sit high on the political agenda for most countries.  Among those issues, few rank higher than transfer pricing policies.  Recent years have seen a trend toward Country-by-Country (CbC) reporting, with many countries adopting the OECD’s Base Erosion and Profit Shifting (BEPS) CbC reporting regime to target transfer pricing risks.  The United States, indeed, adopted a CbC reporting regime consistent with Action 13 of the OECD’s Final BEPS regime, requiring U.S. multinational enterprises (MNEs) to report high-level financial information to the IRS on a country-by-country basis.  In this Insight Post, we take a brief look at several structures that engender somewhat unique considerations for Country-by-Country reporting: Variable Interest Entities; Permanent Establishments; Grantor Trusts and Decedents’ Estates; and Deemed Domestic Corporations.

As background, U.S. Treasury regulations require that the ultimate parent entity of a U.S. MNE group report tax information, on a country-by-country basis, related to the group’s income and taxes paid, together with certain indicators of the location of the group’s economic activity. The IRS anticipates that CbC reports will shine light on high-level transfer pricing risks.  In other words, MNEs can expect to see increased transfer pricing scrutiny in years to come.

A U.S. MNE group is essentially defined as the ultimate parent entity of a U.S. MNE group and all of the business entities that are required to consolidate their accounts with the ultimate parent entity’s accounts under U.S. GAAP (or that would be so required if publicly traded), regardless of whether any such business entities could be excluded from consolidation solely on size or materiality grounds.  Thus, there are a number of “constituent entities” that flow up into the ultimate U.S. MNE group.

And what entities, exactly, make up the “constituent entities” that comprise a U.S. multinational enterprise (MNE) group?  With respect to a U.S. MNE group, a constituent entity is any separate business entity of the U.S. MNE group.  There are, however, some exceptions — such as foreign corporations or foreign partnerships for which information is not otherwise required to be furnished under section 6038(a) or any permanent establishment of the foreign corporation or foreign partnership.  Below, we look at several structures — such as variable interest entities and deemed domestic corporations — and address their current treatment under the tax law.

Variable Interest Entities

Variable interest entities fall within the constituent entities that are part of a U.S. MNE group.  In general, a variable interest entity may be consolidated with another entity for financial accounting purposes, even though that other entity may not control the variable interest entity within the meaning of section 6038(e).  Note that the Financial Accounting Standards Board (the “FASB”) generally defines a variable interest entity, for GAAP and financial accounting purposes, as an entity in which a public company has a variable interest that is not based on majority voting rights.

Permanent Establishments

Under Treasury regulations, the term “business entity” includes a permanent establishment that prepares financial statements separate from those of its owner for financial reporting, regulatory, tax reporting, or internal management control purposes.

For these purposes, the term permanent establishment includes:

  • a branch or business establishment of a constituent entity in a tax jurisdiction that is treated as a permanent establishment under an income tax convention to which that tax jurisdiction is a party,
  • a branch or business establishment of a constituent entity that is liable to tax in the tax jurisdiction in which it is located pursuant to the domestic law of such tax jurisdiction, or
  • a branch or business establishment of a constituent entity that is treated in the same manner for tax purposes as an entity separate from its owner by the owner’s tax jurisdiction of residence.

Grantor Trusts and Decedents’ Estates

Treasury regulations exclude a decedent’s estate and an individual’s bankruptcy estate, as well as grantor trusts within the meaning of section 671, all of the owners of which are individuals, from the definition of a business entity.  The Service ultimately determined that given the nature of grantor trusts, decedents’ estates, and individuals’ bankruptcy estates and their close connection to individual grantors, decedents, and individual debtors, it was not appropriate to include grantor trusts with only individual owners, decedents’ estates, and individuals’ bankruptcy estates in the definition of business entity.

Deemed Domestic Corporations

For these purposes, the Treasury and IRS define a U.S. business entity as a business entity that is organized, or has its tax jurisdiction of residence, in the United States.  The final regulations expressly provide that foreign insurance companies that elect to be treated as domestic corporations under section 953(d) are U.S. business entities that have their tax jurisdiction of residence in the United States.


Transfer Pricing

When unrelated enterprises transact with one another, the underlying assumption is that market forces generally determine the commercial terms of their transaction—e.g., price and conditions of transfer.  But where associated enterprises transact with one another — including entities such as variable interest entities, permanent establishments, and deemed domestic corporations — tax authorities become concerned that the terms of their dealings may be determined by other considerations.  When transfer pricing (the pricing between or among the entities) does not reflect objective market forces, the tax liabilities of the enterprises may be distorted.

Over time, a generally (though not universally) accepted consensus has developed in the international tax community of a concept of an “arm’s-length” transaction—a hypothetical measuring stick against which to measure the pricing and terms used by the related parties.  Where the actual terms deviate significantly from the terms that would have transpired if the transaction had been an “arm’s-length” transaction, tax authorities generally have the authority to recast the transaction and use the “arm’s-length” pricing.  CbC reporting is intended to provide the IRS and other tax authorities with information that provides insight into MNEs’ transfer pricing practices.  And yes, that means that MNEs can expect to see increased transfer pricing scrutiny in years to come.


Freeman Law International Tax Symposium

Readers may be interested in the Freeman Law International Tax Symposium scheduled to take place virtually on October 20 and 21, 2022.  Attendees will qualify for CLE, CPE, and CE and the slate of presenters includes well-recognized speakers and panelists, such as a prior Chief Counsel of the IRS, a former Acting Assistant Attorney General of the U.S. Department of Justice Tax Division, and many others in government and private practice.

To Register for the Freeman Law International Tax Symposium, please visit

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